Question

During 2019,Rainbow Umbrella Corp. had sales of $860,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $680,000, $85,000, and $180,000, respectively. In addition, the company had an interest expense of $55,000 and a tax rate of 21 percent. (Assume that interest is fully deductible.) Suppose the company paid out $65,000 in cash dividends. If spending on net fixed assets and net working capital was zero, and if no new stock was issued during the year, what was the net new long-term debt?

Answer 1

	Sales	$860,000
	Cost of goods sold	($680,000)
	Admin and selling expenses	($85,000)
	Depreciation expenses	($180,000)
	Earning Before Interest and taxes(EBIT)	($85,000)
	Interest expense	($55,000)
	Earning Before taxes(EBT)	($140,000)
	Tax Saving (21%)	$29,400
	Net Income	($110,600)
	ASSETS=EQUITY +LIABILITIES
	Change in Assets	=	Change in Liabilities+Equity
	Change in Assets due to depreciation	($180,000)	Change In Liabilities:
	Spending on net fixed assets	$0	Change in Liabilities	($4,400)	(180000-110600-65000)
	Spending on net working capital	$0	Change in Equity:
			Change in retained earnings-Dividends	($65,000)
			Change in retained earnings-Net Income	($110,600)
	Total Change in Assets	($180,000)	Total Change in Equity	($180,000)
	Net New Long Term Debt decreased by	$4,400